August Auto Sales Remain Strong

July durable goods orders came in weaker than expected, but auto sales, another key economic indicator, remain strong this month.

The August new-vehicle selling rate is expected to be the highest monthly rate in more than four and a half years, according to a monthly sales forecast issued Friday by J.D. Power and affiliate LMC Automotive.

The forecast anticipates a 16% gain to 1.3 million light vehicle sales and a seasonally adjusted annual sales rate of 14.1 million. LMC Automotive anticipates total 2012 light vehicle sales of 14.3 million, the highest level since 16.1 million in 2007. However, the firm recently reduced its annual estimate from 14.5 million units.

"August continues this summer's trend of healthy growth in retail sales as dealers work to sell down inventory in time to make room for 2013 models," said John Humphrey, J.D. Power senior vice president of global automotive operations, in a prepared statement. Incentives are down slightly from July, but deals are available due to model-year sell downs.

"To date, automakers have been diligent in better balancing production with demand, which has been critical to the improved financial performance for many brands," Humphrey said. "Going forward, this discipline will be tested as demand looks to cool somewhat through the balance of the year."

The Census Bureau said Friday that durable goods orders rose 4.2% in July, the third consecutive monthly increase. But excluding transportation, new orders decreased 0.4%. Economists on average expected durable goods to increase 2.4% in July with the core figure seen rising 0.5%.

A positive sign in the auto sector, J.D. Power said, is that retail sales, the best measurement of consumer sentiment, remain strong. As a result, fleet sales represent just 17% of light vehicle sales, less than the 21% year-to-date average.

A key factor driving August auto sales is trade-ins, saidEdmunds.com analyst Ivan Drury. "People are trading in cars because they are getting old," Drury said in an interview. "Consumers are going to need-based purchasing."

In 2005, about 40% of new car buyers traded in an old car, with the trade-ins average five years in age, he said. This year, about 50% of new car buyers trade in an old car, with the average age six years. "That's another 15,000 miles, with more spending on repairs," he said. "The age of their cars is weighing on consumers' consciousness."

J.D. Power said vehicle inventory in early August declined slightly to a 54-day supply, compared with 58 days in July. Car inventory was at 47 days, while truck inventory is at a normal 61-day supply.

Drury said an exception is the Chevrolet Malibu, which has a 96-day supply. "GM(GM) overproduced the 2012s and didn't sell down effectively," he said. "Now there are so many discounts" that sales of the 2013 Malibu are being impacted.

By contrast, the competing Ford(F) Fusion has a 43-day supply, as the 2012 model sells down in anticipation of the fall arrival of the 2013 model.

J.D. Power noted that production for Honda(HMC) and Toyota (TM) in the first seven months rose 79% and 65% respectively, as the recovery continues following 2011 production shortfalls.